Things to Know if you’re Planning to Retire Early?

Planning to retire early? There are several reasons why you may want to quit a full-time job before 66. As you retire at 55 (or earlier), you are still in the pink of your health; the free time gives you an excellent opportunity to pursue your hobbies, spend more time with your family, or perhaps to make your dream trip. Financial insecurity is obviously the last thing you would want to face in these beautiful days. However, an early retirement may not be a good idea for the unprepared. Know what? Leading an affluent lifestyle even if you stop working at 50 is not impossible; all that you need are a few smart retirement planning strategies. Here is how can take baby steps if you’re planning to retire early:

Take Advantage of 72(t)

Retiring early does not necessarily mean that you’ll have to pay the 10 percent penalty for withdrawing from traditional 401(k) plans. Instead, you can take Substantially Equal Periodic Payments (SEPP) from your IRA account under Rule 72(t) without any penalty. Remember, you’ll have to continue it for five years or until you become 591/2 to remain eligible for the exemption. You can calculate the withdrawal amount by using either the method of required minimum distribution or fixed annuitization or fixed amortization. Consider an IRA life expectancy table to decide how you would like to withdraw the amount – whether on a uniform, single, last survivor or joint life basis.

However, 72(t) withdrawals are taxed at the same rate as your income tax. Also, the withdrawals are inflexible, that is, for an alteration of the payment series, you will have to pay the retroactive 10 percent penalty since the initial year of distribution.

Know How to Control Expenses

Cutting down the unnecessary expenses helps save a substantial amount of money which is crucial for the early retirees. For example, according to a study done by the American Automobile Association (AAA), the cost of owning a vehicle that runs 15,000 miles a year is about $8469. The public transport, on the contrary, is quite inexpensive. It’s evident that your yearly expenses drop down significantly when you choose public transport over own vehicle for the daily commute. The same thing should be applied to other recurring expenses relating to things like cable, landline or utilities. Review your monthly expenditure pattern and figure out the area where cost cutting is possible by embracing alternatives that are more economical.

Have a Medical Coverage

One becomes eligible for Medicare at the age of 65. So, if you’re planning to retire early, having a medical insurance either from your or spouse’s employer will help you meet your medical expenses until 65. If there is no such facility, purchase any individual insurances. While buying insurances, check the open enrolment periods. As missing its deadline means you have to wait for one more year to get coverage. Depending on how you would like to share the expenses with the insurer. Insurances are classified into five categories – -catastrophic, bronze, silver, gold and platinum. For instance, the premium for bronze plans is the lowest, but its out-of-pocket cost is the highest. Whereas the platinum plans have the highest premium and lowest out-of-pocket cost. Also, compare between the healthcare provider network, covered medications, and deductibles. Compare all the available plans to find out the most suitable option for you.

Keeping a substantial amount to the health savings account (HSA) is a smart move for those who qualify for a highly-deductible plan. As in some cases it yields better pay-off than the 401(k). Further, the income you are contributing to the HSA is not taxed. Even at the time of withdrawals for paying medical expenses.

Know All the Tax Saving Opportunities (Annuity-Pension)

Put the money in the tax-friendly accounts for faster growth. As married person for tax filing jointly, and when the income is below $186,000, you can fund the Roth IRAs entirely above the income until it exceeds $196,000. If you are older than 50, you can contribute additional $6000 and $1000 to the 401(k) and the IRA respectively.

It is not difficult to create a retirement planning strategythat works.Always focus on covering the essential expenses like medical costs and reducing the taxes as much as possible. So that you can utilize the maximum portion of the fund available. If you are planning to retire early, like before 65. You need to take some unorthodox decisions such as saving more than usual amount in HSA or opting for SEPP. This will give you financial security throughout your golden years.